ECB Plan, Economic Data Shoot ETFs To New Highs

The European Central Bank bond-buying plan, an upbeat U.S. employment report and a positive surprise in the services sector sent exchange traded funds sharply higher around the world Thursday. SPDR S&P 500 (SPY) rallied 2.02% to 143.75 — its highest level since May 2008. PowerShares QQQ (QQQ), tracking the 100 largest nonfinancial stocks on the Nasdaq, surged 2.22% to 69.53...

IShares MSCI EAFE Index (EFA), tracking developed foreign markets, jumped 2.46% off its 200-day moving average. It landed just below a 53.02 buy point in a bullish cup-with-handle chart pattern.

IShares MSCI Emerging Markets Index (EEM) gapped up 2.21%. But it's still trading below its 200-day average. Its 50-day average has crossed below its 200-day line, which is bearish.

"Nothing that happened this morning was really a surprise," said Paul Schatz, president of Heritage Capital in Woodbridge, Conn. "The stock market has been behaving like a coiled snake and today, it struck."

He believes the market has been expecting ECB President Mario Draghi and Federal Reserve Chairman Ben Bernanke to unleash mountains of stimulus.

"The longer this goes on and more 'air' we get under stocks, the bigger the potential disappointment," he said. "But for the short term, it's all systems go."

Debt-Buying Plan

At a press conference in Frankfurt, Germany, ECB President Mario Draghi announced the ECB would buy unlimited amounts of government bonds of indebted countries in an effort to solve the European debt crisis. The ECB would buy short-dated debts with maturities of one to three years to cut borrowing costs for Spain, Italy and others.

Under the plan, dubbed Outright Monetary Transactions (OMTs), countries seeking ECB help must first seek emergency aid from bailout funds of the 17-country European Union and be monitored by the International Monetary Fund. The bond purchases would be "sterilized," meaning they will be done under a complicated scheme that will not increase the money supply. The ECB would publish the size of the purchases on a weekly basis.

"In the short run, we may save Italy and Spain," said John Alan James, professor at Pace University's Lubin School of Business in New York. "But like the Fed printing money and loaning the cash to a federal government up to its neck for $16 trillion, when will the creditors take note and stop buying the ECB bonds?"

Many questions remain unanswered, notes David Owen, chief European financial economist at Jefferies. How will the plan affect inflation? How will it be accepted by Germany, the Netherlands and the Nordic EU members? How will Europe's economy grow out of a recession to pay off its debts? How is the OMT different from the Securities Market Program through which the ECB bought $263 billion in bonds?

"Lost in the events of the day is that the ECB (in its latest quarterly staff projections) revised down the level of euro area gross domestic product at the end of 2013 by almost a full 1%," Owen wrote in a note. "The euro area clearly faces a deteriorating macroeconomic environment, but the ECB stubbornly continues to ignore the elephant in the room."

Critics say the ECB's plan achieves nothing and raises false hopes.

"The only solution is a massive debt restructure in Europe and until that is discussed, the aftermath of this crisis will be severe," says Jeffrey Sica, president and chief investment officer of Sica Wealth Management in Morristown, N.J.

U.S. Economy On Growth Path

The market also cheered economic data releases that showed the U.S. economy is on a modest but positive growth path. Economic activity in the nonmanufacturing business sectors grew in August for the 32nd month straight, according to a survey by the Institute for Supply Management. The nonmanufacturing ISM index registered at 53.7 in August, up 1.1 from a 52.6 reading in July and well above consensus expectations of 52.5. Readings above 50 show expansion. Service companies employ about 90% of the workforce and include everything from retail to health care to financial services.

The August reading suggests U.S gross domestic product is on trend to expand at an annualized rate of just more than 2%, says Jim O'Sullivan, chief U.S. economist at High Frequency Economics.

Jobless claims fell by 12,000 last week to 365,000 — better than expectations of 370,000. HFE noted that the drop in claims could have been because of Hurricane Isaac as people affected by the storm were too preoccupied to file for unemployment. Payroll provider ADP reported businesses added 201,000 jobs last month — the most since March.

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